Happy New Year! 2018 is in the books and the recent turn in markets made it a year to forget for most investors. Q4 saw the much-expected & needed correction in US equities. While the investors seem to be breathing a sigh of relief and jumping back into the market, I am not convinced that this is the end of the correction and expect the downtrend to continue.
Here are the reasons why I continue to be bearish:
The US economy just went through 9 consecutive quarters of growth and the rate of growth is now tapering off. More importantly, most companies had record operating margins when they were hitting their respective all-time high stock prices. So, when you simply look at a short-hand financial number like P/E ratio, keep in mind that the margins are baked into the numbers — which is why you cannot base your full investment decision simply based on one number. Add to that revenue growth has plateaued for companies in this cycle and wage growth has consistently increasing month after month. Even though the Fed doesn’t see a recession coming (they never do), that recipe smells like a upcoming recession to anyone looking at the data objectively.
Tax cuts, low interest rates fueling debt binge, buybacks, record liquidity in the market, the surge of passive investing etc all provided incredible tailwind for stocks in this bull run of over 10 years. As Howard Marks said earlier in mid-2018, the stock market was “priced for perfection”. With the Fed sucking liquidity out of the market by deflating their balance sheet, investors have finally started turning to look at safety trades. Couple that with the corporate debt issues lingering, there’s not much to be excited about in the broad US equity markets.
Outlook for 2019
Normally the first place to run for safety are bonds — but with the Fed indicating that there might 1 or 2 more raises in interest rates, investors have started looking elsewhere — i.e., gold. This is the reason why I have been holding a lot of gold exposure in my portfolio, which I started building in 2016. As it turns out, Q4 2018 (& continuing into 2019) was/is great to be holding gold, grabbing some popcorn, sitting back and watching the fireworks 🙂
There is also a case to be made for a strong US$, which I couldn’t really make sense until I watched these two videos (this & this) and spent some time thinking about this model. Special thanks to Brent Johnson from Santiago Capital for sharing his brilliant take. I think it is worth re-considering the case that both US$ and gold can rise together for a while. However, if it comes to the ultimate conflict between the two (may not happen until early to mid-2020s when we have a full blown pension crisis), I will bet on the hard asset instead of a paper promise from a deep-in-the-red government with no fiscal morality.
My Focus for 2019
My gold and precious metal equities have done very well in 2018, so I intend to let the winners run and potentially look at taking some profits and/or close out some of the losing positions to reduce overall exposure in order to bring it below the 50% line-in-sand I draw for one sector.
I am also looking to increase exposure to gold bullion as I want to continue protecting my assets. While US$ holders may weather the storm better than others in next year or two, other currencies continue to see their purchasing power erode thanks to inflation. As a Canadian citizen, I want to stay hedged and protect my assets. To do this, I already maintain a healthy part of my net worth in US$ and gold. I intend to continue doing so in 2019.
With the correction in stock market, I am finally starting to get interested in some of the blue-chip dividend growth companies again. I have started evaluating some of them and starting to find that they are getting closer to fair value. I prefer having enough margin of safety, so will probably wait for them to fall a more before buying. Watch this space for monthly updates on where I am seeing more value and considering stock purchases.
With the safety trade already on, investors are rotating or already rotated into utilities, healthcare & consumer staples. So, the best deals are probably not to be found there. Most outflows have occurred in in tech, financials, energy, consumer discretionary — so, I am starting to look at these sectors to hunt for value plays.
As of Jan 1, 2019 our portfolio is diversified as shown below.
Looking for investment ideas? Check out this Top Investment Picks for 2019, where 30+ investors present their top pick and a reason to invest in those securities.
What are your thoughts on the points mentioned above? Do you have any specific thoughts on the markets and looking at anything interesting? Share with a comment below.
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